Financial Ratios - Essay Example

In a family business, it is essential to measure the performance o individuals both belonging to the family and nonfamily members for many reasons such as succession planning, hiring of management at the top level, etc. At Benson Electrics when the CEO and founder, Buck Benson passed away, he did not make a proper succession planning as to who out of his three children from two different wives, would succeed him. It was due to performance indicators such as skill-based performance financial performance of each child and their interpersonal skills; the company was able to decide who would be the next CEO of the company (Harvard Business Review)

Key performance indicators such as financial ratios and pay for performance are a good way to assess the overall and individual performance of an individual in the organization. The basic KPIs used by family-owned businesses could be:
Financial ratios, these are good indicators of how well the business is doing financially. This is because the biggest risk in a family business is the mismanagement if finances and useless spending by family members on their personal affairs. Measures such as sound financial reporting and analysis can allow the organization to keep a check and balance on the performance of both the company and the individuals working within it.

Pay for performance is also another way to measure good business performance in a family business. Individuals in a family business are driven toward making the company successful and have a thirst to prove their worth. If the company works according to the rules that are applied to all employees and not just family members, pay for performance can be a good indicator of business performance.
The biggest risks apart from the financial drain are rivalry among family members over ownership and capital, nepotism and favoritism, and sibling rivalry after succession. To avoid this, proper succession planning should be in place so that even after the demise of the first generation, the business performs well enough to go to the second generation.

Family governance
Family governance involves the family regularly meeting and discussing where the company is headed and devising long-term strategies. It involves the members who are on the B.O.D. to meet with the members of both family and management to discuss how the organization is performing under the set values of the family. As mentioned, most family businesses tend to involve themselves more in philanthropy due to the values it holds There are three components of family governance.
• Periodic usually annual assembly meetings of the family, all families close or far who are involved can be involved.
• Family council meetings for those families that benefit from an agent group of their members doing planning, creating policies, and strengthening business-family communication and bond.
• A written family constitution that includes family policies, business vision, mission, and values that standardize members' connection with the company.

These three components help:
• Developing clarity on the roles, rights, and responsibilities of members
• Supports family, employees, and owners to perform responsibly toward the business
• Controls suitable family and owner enclosure in business negotiations.
(Harvard Business School)
Corporate Governance
The governance of a family business is more complex than that of a nonfamily business because of the central role of the family that leads the business.


When it comes to Corporate Governance, Shareholder meetings are only attended by my family members who are on the board. Non-ownership families should not be involved in shareholders' meetings and B.OD meetings as that could result in conflicting decisions. As in the case of Benson Electrics, when meetings were held to decide who would succeed, Joyce, although one of the wives of the Buck was not present as she was not an owner.
The role of the chairman and director in a family business becomes more defined when the business starts to grow. Once the company goes public then proper roles and responsibilities and titles are assigned and the duties of the chairman and director become different. The chairman heads the meeting can be outside members. Directors lead the meeting making various decisions. The roles of directors are defined according to their expertise. It is advised that a nonfamily member should be hired for a function if an experienced family member can’t be found.
Dabur’s CSR
Dabur has initiated a program called SUNDESH, which is
Sustainable Development Society’s aim is to ensure overall socio-economic development of both the rural & the urban population below the poverty line on a sustainable basis, through different participatory and need-based initiatives. (Dabur) It aims to reach out to the weaker and more vulnerable sections -- such as women and children, the illiterate, and especially the unemployed society. This CSR initiative not only helps society but creates a more sustainable pool of both skills. Read More